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How does rising public debt burden the economy? Discuss the measures introduced by the Fiscal Responsibility and Budget Management Act, 2003 to mitigate this issue. (200 words)
Model Answer How Rising Public Debt Burdens the Economy Rising public debt imposes significant pressures on an economy in various ways: Burden on Future Generations Public debt transfers the financial burden to future generations. Governments issue bonds to raise funds for current expenditures, whicRead more
Model Answer
How Rising Public Debt Burdens the Economy
Rising public debt imposes significant pressures on an economy in various ways:
Public debt transfers the financial burden to future generations. Governments issue bonds to raise funds for current expenditures, which will need to be repaid in the future. This means that the next generation will bear the responsibility of repaying the debt, often through higher taxes or reduced government spending (Source: FRBM Act, 2003).
As public debt rises, the government must allocate a larger portion of its budget to pay interest on the debt. This reduces the funds available for essential services, like education, healthcare, and infrastructure. Over time, higher interest payments can crowd out other critical investments in the economy (Source: Government of India).
Excessive government borrowing can lead to inflation. Increased borrowing often raises interest rates, making it costlier for businesses and consumers to borrow. Moreover, higher government spending increases aggregate demand, which can drive up prices (Source: RBI reports).
Public borrowing can lead to “crowding out” of private investment. When the government issues bonds to finance its deficits, it competes with private companies for available funds. This can lead to higher interest rates, making it more difficult for businesses to obtain credit for expansion (Source: Economic Survey, 2020).
Measures Under the Fiscal Responsibility and Budget Management Act, 2003
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted to manage public debt and ensure fiscal discipline:
The Act mandates the government to reduce the fiscal deficit to below 3% of GDP. This limit ensures the government does not overspend beyond its means and curtails excessive borrowing (Source: FRBM Act, 2003).
It also requires the government to eliminate the revenue deficit and work towards creating a revenue surplus. This enhances fiscal health by ensuring that the government’s recurring expenditures are covered by its regular income (Source: Ministry of Finance).
The Act restricts borrowing from the Reserve Bank of India, ensuring that the government does not excessively rely on the central bank for financing. This reduces inflationary pressures and ensures that monetary policy remains independent (Source: FRBM Act, 2003).
In conclusion, the FRBM Act provides a structured framework for managing public debt, aiming for long-term macroeconomic stability by curbing excessive borrowing and promoting fiscal responsibility.
See lessDespite several initiatives aimed at improving the fiscal health of states in India in recent years, there are still several challenges that need to be addressed. Discuss in detail. (200 words)
Model Answer Challenges in Improving Fiscal Health of States in India Despite several initiatives to improve the fiscal health of states in India, challenges remain that require focused attention and reform. Below are the key issues: 1. High Fiscal Deficit and Debt Levels India's states faced a signRead more
Model Answer
Challenges in Improving Fiscal Health of States in India
Despite several initiatives to improve the fiscal health of states in India, challenges remain that require focused attention and reform. Below are the key issues:
1. High Fiscal Deficit and Debt Levels
India’s states faced a significant fiscal burden in recent years. In 2020-21, the gross fiscal deficit (GFD) was 4.1% of GDP, and the debt-to-GDP ratio stood at 31.1%, both exceeding the targets set by the Fiscal Responsibility and Budget Management (FRBM) review committee. Although measures like the Special Assistance Scheme (₹1,00,000 crore interest-free loans) and reform-linked borrowing limits have helped, the GFD is still projected to be 3.4% in 2022-23, which remains higher than the FRBM target of 3%. Similarly, debt levels are expected to ease slightly to 29.5% but remain above the recommended 20% (Source: Government of India Budget Documents).
2. Rising Share of Cess and Surcharge
The increase in the Centre’s reliance on cess and surcharges has reduced the share of tax revenues devolved to states. These non-shareable taxes have grown from 8% of total revenue in 2011-12 to nearly 28% in 2021-22, severely affecting state budgets (Source: Ministry of Finance, Government of India).
3. Dominance of Committed Expenditures
A substantial portion of state budgets is consumed by committed expenditures, such as salaries, pensions, and interest payments. In 2022-23, states allocated about 54% of their revenue receipts to these non-discretionary costs, leaving less room for developmental spending (Source: Reserve Bank of India).
4. Low Own Revenue Generation
Many states continue to struggle with low own revenue due to inefficient state-owned enterprises, weak distribution companies (discoms), and poor tax administration. This is exacerbated by challenges in improving tax compliance and forecasting revenue accurately (Source: NITI Aayog Reports).
5. Populist Schemes and Fiscal Stress
Programs like farm loan waivers and old pension schemes, which have been implemented by some state governments, add to the fiscal strain. While politically popular, these schemes result in long-term fiscal obligations that hinder fiscal consolidation (Source: Indian Economic Survey).
Conclusion
To enhance fiscal health, states must focus on improving revenue generation, reducing fiscal deficits, and ensuring that populist measures do not undermine fiscal discipline. Debt consolidation and fostering private sector investment should be prioritized for sustainable fiscal management.
See lessWhat is your understanding of digital tax? Explain the rationale for its introduction in India and discuss the challenges associated with its implementation. (200 words)
Model Answer Understanding Digital Tax and Its Rationale in India What is Digital Tax? Digital tax refers to taxes imposed on digital goods, services, or business activities conducted over the internet. In India, this tax is primarily aimed at non-resident digital companies that generate significantRead more
Model Answer
Understanding Digital Tax and Its Rationale in India
What is Digital Tax?
Digital tax refers to taxes imposed on digital goods, services, or business activities conducted over the internet. In India, this tax is primarily aimed at non-resident digital companies that generate significant revenue from the Indian market, such as Google, Facebook, Amazon, and others. India introduced the Equalization Levy (EL) in 2016, a 6% tax on non-resident digital companies. This was expanded in 2020 to include a 2% Digital Service Tax (DST) on foreign e-commerce businesses with a turnover of over Rs. 2 crore annually (Source: Finance Act 2020).
Rationale for Introducing Digital Tax in India
Traditional tax laws were designed around brick-and-mortar businesses. The rise of digital services created a gap in tax regulations, leading India to introduce DST to better capture revenues from the digital economy (Source: Finance Act 2020).
The introduction of digital tax aligns with global efforts, like the OECD’s BEPS (Base Erosion and Profit Shifting) program, which seeks to reform international tax laws to ensure that digital companies pay taxes where they earn revenue (Source: OECD).
The digital tax ensures that foreign digital companies contribute to the Indian economy, creating a level playing field for both domestic and international businesses operating in India (Source: Government of India).
Challenges in Implementing Digital Tax
The United States has criticized India’s DST, claiming it discriminates against U.S.-based digital companies by excluding domestic companies. This has led to investigations and the threat of retaliatory tariffs, potentially escalating into a tax war (Source: U.S. Trade Representative).
Critics argue that the digital tax may be passed onto consumers in the form of higher prices for goods and services, defeating the purpose of targeting foreign companies (Source: Industry Experts).
International disputes over tax compliance and the absence of a unified dispute resolution mechanism complicate the effective enforcement of digital taxes (Source: OECD).
Developing nations like India have expressed concerns over global agreements that restrict their ability to enact future digital taxes, potentially undermining their sovereignty in tax matters (Source: Government of India).
To address these issues, coordinated global efforts and clear dispute resolution frameworks are essential for the successful implementation of digital tax.
See lessExamine the monetary policy framework in India and discuss the challenges it faces in terms of monetary management. (200 words)
Model Answer Monetary Policy Framework in India India’s monetary policy framework, established through the Monetary Policy Framework Agreement (MPFA) signed in February 2015, emphasizes flexible inflation targeting (FIT). This framework mandates the Reserve Bank of India (RBI) to achieve an inflatioRead more
Model Answer
Monetary Policy Framework in India
India’s monetary policy framework, established through the Monetary Policy Framework Agreement (MPFA) signed in February 2015, emphasizes flexible inflation targeting (FIT). This framework mandates the Reserve Bank of India (RBI) to achieve an inflation target set by the government in consultation with the central bank. The inflation target is set at 4%, with a ±2% tolerance band, determined every five years (Source: Author’s content).
A key feature of the monetary policy framework is the establishment of the Monetary Policy Committee (MPC), which consists of six members, including the RBI Governor. The MPC is tasked with setting the policy rate to align inflation with the target. It uses various instruments such as open market operations, reserve requirements, and the policy rate to achieve operational targets like short-term money market interest rates and reserve money (Source: Author’s content).
The overarching goals of India’s monetary policy are price stability, economic growth, financial stability, and exchange rate stability. These goals aim to ensure a stable economic environment conducive to growth while controlling inflation and maintaining currency stability (Source: Author’s content).
Challenges in Monetary Management
Despite a well-defined framework, India faces several dilemmas in monetary management:
Conclusion
The monetary policy framework in India is well-structured, focusing on inflation control, economic growth, and stability. However, the central bank faces multiple challenges such as balancing growth with inflation, managing fiscal and monetary tensions, and addressing external sector pressures. To address these dilemmas effectively, coordination between the RBI and the government is crucial, especially in the context of global economic integration (Source: Author’s content).
See lessDiscuss the benefits and risks associated with the internationalization of the rupee for the economy. (200 words)
Model Answer Benefits of Internationalizing the Rupee Mitigation of Currency Risks The internationalization of the rupee can help Indian businesses reduce currency risks associated with global trade. By conducting cross-border transactions in rupees, companies can shield themselves from exchange ratRead more
Model Answer
Benefits of Internationalizing the Rupee
The internationalization of the rupee can help Indian businesses reduce currency risks associated with global trade. By conducting cross-border transactions in rupees, companies can shield themselves from exchange rate volatility, which in turn lowers transaction costs and helps stabilize their operations in international markets. This improves their ability to compete globally (Source: Author’s content).
With reduced exposure to currency fluctuations, Indian businesses could gain better leverage in negotiations with foreign partners. This would not only reduce costs but also improve the prospects for growth, making Indian businesses more attractive to global markets (Source: Author’s content).
Using the rupee in international trade would allow India to make independent trade decisions, avoiding the influence of major currencies like the US dollar. This could provide India with more flexibility in setting favorable terms for its exports and imports (Source: Author’s content).
Internationalizing the rupee could reduce the need for India to hold large foreign reserves, which currently incur a cost in the form of income transfers to advanced economies. This would help retain more financial resources within India (Source: Author’s content).
The rupee’s internationalization could facilitate smoother access to global capital, encouraging investment in India’s economy. This influx could enhance national savings and spur economic growth (Source: Author’s content).
Risks of Internationalizing the Rupee
With the increased use of rupees abroad, foreign investors might hold substantial rupee reserves, which could potentially destabilize the Indian economy if global conditions worsen, as foreign capital could quickly move in or out (Source: Author’s content).
The central bank’s ability to control the domestic money supply and influence interest rates could be compromised as a result of rupee internationalization. This would require stronger policy tools to manage external influences on the domestic economy (Source: Author’s content).
Non-resident holdings of rupees might increase the sensitivity of India’s financial markets to global economic shifts, leading to higher volatility in domestic markets (Source: Author’s content).
Full convertibility could lead to unrestricted capital inflows and outflows, making India more susceptible to the risks of sudden financial market changes, such as a “risk-off” scenario where foreign investors pull out funds quickly (Source: Author’s content).
In conclusion, while the internationalization of the rupee offers significant opportunities for India’s economic growth, it also introduces challenges that need careful management. The benefits of enhanced global trade and investment must be weighed against the risks of increased volatility and external dependency.
See lessProvide a description of the various instruments at the disposal of the RBI for regulating the money supply in the economy. (200 words)
Model Answer Instruments Used by the RBI for Regulating Money Supply The Reserve Bank of India (RBI) employs various tools to regulate the money supply in the economy, aiming to balance inflation control with economic growth. These tools can be broadly classified into Quantitative and Qualitative meRead more
Model Answer
Instruments Used by the RBI for Regulating Money Supply
The Reserve Bank of India (RBI) employs various tools to regulate the money supply in the economy, aiming to balance inflation control with economic growth. These tools can be broadly classified into Quantitative and Qualitative measures.
Quantitative Measures
The RBI conducts buying and selling of government securities in the open market. By selling securities, it absorbs liquidity from the banking system, thereby reducing the money supply. Conversely, buying securities injects money into the economy, increasing the money supply.
CRR is the minimum percentage of a bank’s total deposits that must be kept in reserve, either as cash or with the RBI. Increasing the CRR reduces the liquidity available for lending by commercial banks, thereby controlling credit creation.
The SLR is the portion of a bank’s net demand and time liabilities (NDTL) that must be invested in government-approved securities. By altering the SLR, the RBI can influence the amount of credit banks can extend.
The LAF consists of two key rates:
Qualitative Measures
The RBI sets margin requirements, which are the differences between the value of securities pledged by borrowers and the loan amount. This helps control speculative lending and ensures prudent lending practices.
The RBI can ration credit, guiding banks to extend credit to priority sectors like agriculture and education, while restricting loans to less critical sectors.
The RBI uses moral suasion by advising commercial banks to adjust their lending policies. This may involve persuading banks to restrict loans for speculative purposes or to focus on sectors in need of credit support.
By combining both Quantitative and Qualitative measures, the RBI effectively manages money supply and promotes economic stability.
See lessExplain the concept of a Non-Banking Financial Company (NBFC) and delineate its distinctions from a commercial bank. Evaluate the importance of NBFCs within the Indian financial system.
Model Answer Concept of Non-Banking Financial Company (NBFC) and Distinctions from Commercial Banks: A Non-Banking Financial Company (NBFC) is a registered entity under the Companies Act, 1956, engaging in various financial activities such as loans, investments in securities, and other financial insRead more
Model Answer
Concept of Non-Banking Financial Company (NBFC) and Distinctions from Commercial Banks:
A Non-Banking Financial Company (NBFC) is a registered entity under the Companies Act, 1956, engaging in various financial activities such as loans, investments in securities, and other financial instruments. Key features include avoiding primary activities like agriculture, industrial pursuits, or real estate dealings. NBFCs can also gather deposits through various schemes. They obtain licenses from the RBI but are supervised by different agencies based on their functions.
Differences from Commercial Banks:
Importance of NBFCs in the Indian Financial System:
1. Microfinance Expansion:
2. Market Complementarity:
3. Financial Inclusion Role:
4. Employment Generation:
5. SME Support:
6. Customer Benefits:
In conclusion, NBFCs are integral to India’s financial ecosystem, driving infrastructure development and tailoring services to meet diverse client needs. Their role in fostering financial inclusion, supporting SMEs, and providing employment underscores their significance in the nation’s economic progress.
See lessExamine the importance of digital transactions in India and outline the suggestions proposed by the Nandan Nilekani Committee to enhance the adoption of digital payments nationwide.
Model Answer Importance of Digital Transactions in India Digital payment transactions in India have surged significantly, reaching 8840 Crore transactions in FY 2021-22 from 2071 crore transactions in FY 2017-18, showcasing the collective efforts of the government and stakeholders. Various modes likRead more
Model Answer
Importance of Digital Transactions in India
Digital payment transactions in India have surged significantly, reaching 8840 Crore transactions in FY 2021-22 from 2071 crore transactions in FY 2017-18, showcasing the collective efforts of the government and stakeholders. Various modes like BHIM-UPI, IMPS, NETC, and RuPay have seen substantial growth, transforming the payment landscape by enabling P2P and P2M transactions. Key significance includes:
Instant and Convenient Payments
Financial Inclusion
Government Transparency
Enhanced Credit Access
Security
Recommendations by Nandan Nilekani Committee
Targets for Digital Payments
Subsidized MDR
Government Payments
Grievance Redressal
Transaction Efficiency
To further deepen digital payments, improving connectivity, enhancing cybersecurity measures, promoting awareness, and digital literacy are essential focus areas for the government.
See lessExamine the importance of green accounting and the obstacles faced in its execution within India.
Model Answer Importance of Green Accounting in India Better Policy-making and Sustainable Growth Fact: Green accounting enables informed policy decisions balancing economic growth with environmental conservation. Source: Ministry of Environment, Forest and Climate Change, India. Biodiversity ConservRead more
Model Answer
Importance of Green Accounting in India
Better Policy-making and Sustainable Growth
Biodiversity Conservation
Promotes Innovation
Improved Quality of Life
Enhanced Corporate Social Responsibility
Access to Capital
Obstacles in Green Accounting Implementation in India
Developmental Imperatives
Lack of Reliable Data
Absence of Multisectoral Accounting
Additional Costs
Lack of Accountability
Efforts at various levels are crucial to establish effective policies and incentives for a universal green accounting system in India to ensure sustainable development and preserve natural resources for future generations.
See lessDiscuss the limitations of using GDP as the primary indicator for comparing well-being among countries, despite its widespread usage. (200 words)
Model Answer Limitations of Using GDP as the Primary Indicator for Comparing Well-Being Among Countries Economic Inequality Fact: GDP fails to disclose economic inequality within nations, a consequence of economic growth. India witnessed a doubling of income inequality over two decades of high GDP gRead more
Model Answer
Limitations of Using GDP as the Primary Indicator for Comparing Well-Being Among Countries
Economic Inequality
Negative Externalities
Unaccounted Unpaid Work
Intangibles
GDP, while informative about economic performance, inadequately represents the holistic well-being of populations. To mitigate these limitations, economists have proposed alternative indices such as the Human Development Index (HDI), Human Poverty Index (HPI), Gross National Happiness Index (GNH), and Green GDP. These measures offer a more comprehensive view of well-being and societal progress, aiding policymakers in making informed decisions.
By supplementing GDP with these alternative indicators, policymakers can better grasp the overall welfare and quality of life within a country, fostering more inclusive and holistic development strategies.
This discussion outlines the deficiencies of relying solely on GDP as a gauge of well-being among countries, integrating data from credible sources to provide a comprehensive perspective on the topic.
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